The Governing Council of the European Central Bank (ECB) has decided to raise the key interest rate to 2.5 percent. This step is deemed necessary to stabilise inflation expectations and secure the central bank's credibility. The current increase in the key interest rate represents a reaction to persistently high inflation in the Euro area and aims to ensure price stability in the medium to long term.
From the perspective of the German Institute for Economic Research (DIW Berlin), however, the key interest rate hike is not expected to bring about substantial changes in short and medium-term inflation developments. This also applies to the coming year. The primary cause of current inflation is seen almost exclusively in the energy price shock, which has manifested as a result of the conflict in the Middle East. According to DIW Berlin, the ECB has only limited direct means of action against such an external supply shock.
Strengthening Safeguards and Signalling Effect
Although inflation expectations in the Euro area are still considered well anchored, the ECB is improving its safeguards against potential second-round effects with this measure. These could arise from demands by companies and trade unions. The central bank is sending a clear signal to all economic actors that it takes its mandate for price stability seriously and is prepared, if necessary, to accept a dampening effect on the Euro area economy to achieve this.
The ECB is also keeping all options open for the future, which is considered justified given the enormously high uncertainty. A renewed escalation of the conflict in the Middle East could further significantly increase energy prices and thus inflation. Nevertheless, a warning is issued against an excessive reaction. Long-term interest rates have already risen considerably, primarily due to doubts among businesses and markets about the political capacity to act, particularly in the United States. This circumstance reduces the pressure on the ECB to raise interest rates much further.
Implications for the Real Estate Market
For the real estate market in Munich and Bavaria, the rising key interest rates signify a continuation of the trend towards higher financing costs. While the ECB primarily targets inflation control, its decisions directly influence lending conditions for investors and private buyers. A stabilisation of inflation expectations could lead to more reliable planning predictability in the long term, but in the short term, it could make access to capital more difficult. The general uncertainty, fuelled by geopolitical developments and energy prices, remains a dominant factor that market participants are closely observing.
